Strategy for the Telecommunications, Media and Technology industries

Jeff Bezos’s Annual Letter: 3 ‘take aways’

Every year since Amazon’s inception in 1997, Jeff Bezos (founder and CEO of Amazon) has been writing a letter to shareholders. This year’s letter is the 20th edition which makes for an excellent point of reflection for the company that now has US$107BN in annual sales and a market cap of US$296BN just behind Facebook (sales US$18BN, market cap US$312BN).

The theme of Bezos’s letter could be summarised as avoiding the perils of scale and maturity or ‘avoiding stasis’ which is neatly refered to as ‘Day 2’. He advocates for quick decisions, ‘obsessing on customer outcomes’ and maintaining a continuous state of ‘Day 1’ – the beginning of a company’s potential. This post covers 3 ‘take aways’ I had from the letter.

The importance of a ‘Day 1’ approach in mature businesses

Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1

I don’t believe any business aims to pursue an ambition of ‘stasis’ or ‘irrelevance’. Quite the opposite actually – many strategies ‘aim to win’ in design and execution. So what is Bezos actually talking about here? Having worked with mature businesses as well as companies launching new products/operations there is often a different approach, culture, leadership and mindset at work compared to those that are pursuing scale, standardisation and optimisation. Businesses ‘starting out’ or as Bezos terms it ‘Day 1’ use an approach which is one primarily of experimentation, accepting failures, planting seeds, protecting saplings, and doubling down on customer delight. Outcomes are a major focus for ‘Day 1’ business (e.g. customer engagement, feedback). However, a ‘Day 1’ approach is often given less emphasis as strategy is translated to execution and scale through policy and process. The point Bezos makes is that in the long run, by ensuring a ‘Day 1’ approach is the policy and outcomes are managed (not process), businesses will be able continue to delight customers, stave off competition and avoid ‘painful decline’.

Bezos makes this point really well. A ‘Day 2’ approach to decision making can be one of analysis paralysis and consesnsus building which may lead to high quality decision making albeit very slowly. Having worked with organisations at both ends of decision making velocity (slow = 18-24mths vs. fast = days or weeks) there is a different culture that aligns to a high-velocity decision making organisation. The primary factor is that each decision should be judged on its merits with the authority appropriately delegated to individuals to make those decisions in a timely manner. Bezos adds a few nuggets here:

1) 70-90% of information is all you need, any more and your business is likely to lose velocity

2) Be good at recognising and correcting bad decisions (Amazon did this well with their smartphone product – Fire)

Day 1 companies embrace external trends quickly – they don’t use words like ‘cannibalisation’… this is a Day 2 mindset.

The outside world can push you into Day 2 if you won’t or can’t embrace powerful trends quickly. If you fight them, you’re probably fighting the future. Embrace them and you have a tailwind.

I doubt you will ever hear Amazon talk about a new product or service ‘cannibalising’ their existing business. For that matter you are unlikely to hear this at Apple, Facebook or Google. However, in incumbent organisations this is often the language. In his letter, Bezos talks about embracing external trends, which on face value most business leaders would agree with. Truly embrace external trends may mean giving up some ground on a profitable core business in return for growing new revenue streams of the future – this is the hard part. He also suggests this needs to be done quickly. Working out the balance of core and new business (‘What level of cannibalisation is tolerable?’) can lead to slow decision making by which time a more nimble competitor is taking a lead on the trend and eating away at the core.

There are so many examples of embracing external trends over fearing cannibalisation – Apple’s iPod vs iPhone is a good one. In the year the iPhone launched (2007) the iPod was 42% of revenue and the iPhone 2.5% – iPhone launched during peak iPod. At latest results, iPhones were close to 80% of Apple’s revenue with iPod now diminished to a button on an iPhone screen. The smartphone was the external trend, which meant ‘cannibalising’ a very profitable and successful business at its peak.

I won’t be surprised if you haven’t finished reading this blog post and have instead gone straight to reading the letter – it’s a really interesting one. The letter came out a few weeks ago so there are also some interesting points of view on the content. I really enjoyed this article in the AFR on why Australian listed companies may struggle to replicate Bezos’s advice – suggesting that the primacy of shareholder over customer is a balance many Australian companies struggle with.